Entry Mode in the Chinese Car Industry - Essay Example

As more and more manufacturing companies, operating internationally, face heavy domestic and global pressure and make increasing Foreign Direct Investment (FDI) abroad, the research of the entry mode decision has caught the attention of managers and academic scholars. In this regard, many theories, which identify and focus on diversified variables that influence the entry mode decision, have been developed. After several years of continuous growth, China is now the fourth-largest automobile market in the world next to U.S., Japan and Germany.

Even the development continues at just half its current pace, there is a possibility that China could leap into second place in 3-5 years. Automobile executives, facing flat or falling sales in their home markets, predict that China will become their biggest market on the next decade. Thus competitions in the Chinese car market will become tough, which will eventually mark down automobile prices to a rational level and extend competition in price, quality and after-sale service. Since there is an increase in the number of wealthy Chinese yearly and that the recent statistics reveals that Chinese private citizens have overtaken the government in the purchased of car units, automobile giants both at home and abroad look at the Chinese car market as their prospect. . Probably the mounting of sales is attributed to the car loan offerings of banks, series of price cuts for homemade cars promoted by a tariff cut in January and the construction of additional roads.

There is immense untapped growth potential in China's automobile market. According to government statistics, last year car ownership was only 1.5 units per 1,000 persons over the global average of more than 90 units. Besides, statistics also reveal that in the next five years about 32% of China's urban residents intend to buy a car. These results bode well for car marketers both in China and abroad. Giant global automobile industries now are either responding with vast investment or reforming models like mini cars that most fit the Chinese family use.

Following Volkswagen and Citroen, almost all of major car manufactures, such as General Motors, Ford Motor, Honda, Fiat, Toyota and Mazda, made investments in joint ventures with Chinese carmakers successively thus intensifying competition for market shares. Unlike the international automobile giants, China's automobile industry is fragmented. Of the 118 car manufactures in China, most are small, whereas its top five manufacturers produced 37 percent of total output in 2001. However, with the current low labor cost which is only one-twentieth and one-thirtieth of that in Japan, the government labeled China as a "pillar industry" that has great room for development.

But still it is expected to be a difficult process and the need for Chinese government restructure the industry is yet to realize. With the commitments to the WTO in 2003, China has agreed to implement another round of tariff cuts for automobiles before ultimately reducing the tariff level for automobiles to 25 percent by 2006. Besides, China is also